5 factors that Singapore investors need to consider before investing in bonds

2020 has proven to be a tricky year to invest in the financial markets.

After witnessing one of the worst stock market crashes in recent times, where broad country indexes such as the S&P 500 declined by about 30 per cent, the stock market then rallied back quickly, spurred on by stimulus measures rolled out by governments around the world.

Given the high volatility in the stock market, it comes as no surprise that some investors may prefer bonds over stocks.

When you invest in bonds, you are choosing to invest in the debts being issued by governments and corporations. This is as opposed to investing in stocks, where you become a part-owner of a corporation.

In general, bond prices tend to be less volatile, are considered safer, and may sometimes share an inverse relationship with the stock market.

Also, unless designed otherwise, bonds are legally obliged to pay out a fixed and regular coupon payments, which provides predictable cash flow for income seeking investors.

This is as compared to stocks where dividend payments are neither fixed not compulsory. This makes bonds an important component of your asset allocation mix.

Investing in the bonds being issued by corporations is typically seen as simpler than investing in stocks. However, this doesn’t mean it’s as straightforward as what some investors may think.

In this article, we highlight five factors that Singapore investors need to consider before investing in bonds.

1. Interest rates & coupon payments

One of the main reasons many investors choose to invest in bonds is for its stable coupon payments.

This is typically an annual or semi-annual payment that bond issuers pay to bondholders who invest in the bonds.

Bond issuers, whether they are government, quasi-government or private companies, are legally obliged to make the promised coupon payments and repay the initial capital upon the bond’s maturity.

For example, City Development Ltd, which is one of the largest real estate companies in Singapore and part of the Straits Times Index (STI), has a 10-year bond that was issued in 2013.

Called the CITSP 3.480% 03APR2023 Corp (SGD), it provides a semi-annual coupon payout of 3.48 per cent.

This means if you invest in a bond with a par value of $250,000, you will get interest coupon payments amounting to $8,700 each year.

On April 2023, the bond will mature, and the amount borrowed will be returned to bondholders at that point in time.

2. Risk and rating

While investors naturally want higher returns in the form of higher coupon payments, you need to remember that with higher expected returns come higher risk.

If a bond issuer isn’t perceived by the financial markets as a great borrower, it may need to compensate potential investors by giving them a higher coupon payment.

Some bonds may be rated by one of the big three rating agencies – Standard & Poor, Moody’s and Fitch. These are independent rating agencies that assess the quality of bonds being issued by corporations.

Many investors, including institutional investors, may rely on these ratings to aid their bond investment decisions.

However, we also need to note that there are many bonds issued in Singapore that do not have credit rating.

An unrated bond does not equate to a poor quality or high-risk bond, but rather, simply means that it was not rated by any rating agencies.

As bond investors, you need to do your homework before investing in bonds, regardless of whether the bonds are rated or not.

You want to lend your money to creditworthy corporations knowing that they will return you the principal amount borrowed and the coupon payments promised.

One way to get more information about the bonds that you are looking to invest in is through Bondsupermart, a platform that provides free bond information, tools and credit analysis to bond investors.

Bondsupermart has recently published its 2H 2020 Recommended Bonds Report, which can be a valuable resource for Singapore bond investors looking to pick out quality bonds to invest.

You can access the report for free here to get an independent analysis on some of the featured bonds.

3. Maturity of the bonds

Unlike stocks where your investment horizon can be indefinite, most bonds are issued with a maturity date, that you should already know before you make your bond-investment decisions.

This could be from a few years, to possibly up to 10 years or more.

Some bonds may even be perpetual bonds, which means that coupon payments will continue indefinitely until the companies or the investors choose to redeem the bonds.

The maturity of the bonds is an important factor that you should not ignore.

The longer the maturity, the riskier a bond tend to be since you are lending to the bond issuers for a longer period of time.

As an investor, you should ideally choose a maturity period you are comfortable with.

4. Secondary market

After a bond has been issued, you can still buy and sell the bonds on the secondary market.

For example, if you invested in a 10-year bond and need to sell it after five years, you can do so on the secondary market.

Before investing in a bond, it’s worth knowing the secondary market which it can be traded on.

As opposed to stock investment, which are usually publicly traded on an exchange, most bonds tend to be traded on the over-the-counter (OTC) market.

The OTC market is a decentralised market where dealers are the ones that are buying and selling bonds from investors.

Since they can be traded on the OTC or on an open exchange, it’s important to know that bonds can also increase or decline in value on the secondary market.

For example, in the case of the City Development Ltd bond – CITSP 3.480% 03APR2023 Corp (SGD), we see can from the current price being quoted on Bondsupermart that the indicative bidding price (as of July 29, 2020) is 102.498.

This means an investor who holds a face value of $1,000,000 of the bonds can sell it for $1,024,980 today on the OTC market.

If you are looking to buy bonds, you can likewise consider bonds on the secondary market. Platforms like Bondsupermart are ideal places that you can look at to choose from a wide range of bonds.

This provides you with extensive options to choose from based on what’s suitable, instead of only subscribing to new bonds being issued.

5. Yield-to-maturity

If you are buying a bond from the secondary market, you should be looking at the yield-to-maturity to determine your investment return, rather than the coupon payment.

For example, if you were to invest in one of the SIA bonds – SIASP 3.030% 28Mar2024 Corp (SGD) – Retail , you would be able to tell, just by looking at its name, that the bond provides a coupon payment of 3.03 per cent per annum (payable semi-annually).

However, because the bond is currently trading at an asking price of 100.237 (as of July 29), you will need to pay $100,237 for a bond with a par value of $100,000.

As such, your yield-to-maturity (i.e. the returns that you get by holding the bonds to maturity) will be lower at 2.980 per cent, and not the coupon rate of 3.03 per cent.

Bonds can provide stable returns at much lower risk, but you have to choose the right bonds to invest in

Similar to stocks, bonds are not created equally.

There are good quality bonds that you can invest in as well as bonds that you may prefer avoiding – unless you can stomach the additional risk of investing in them.

The advantage of investing in bonds over equities is that your returns are generally secured as long as the bond issuers do not default.

That said, you need to make sure that you invest in the bonds being issued by the right companies.

Otherwise, you might end up making an investment loss if the company defaults on its payment.

This article was first published in Dollars and Sense.